| Matter of XO N.Y., Inc. v Commissioner of Taxation & Fin. |
| 2008 NY Slip Op 04241 [51 AD3d 1154] |
| May 8, 2008 |
| Appellate Division, Third Department |
| In the Matter of XO New York, Inc., Petitioner, v Commissioner ofTaxation and Finance et al., Respondents. |
—[*1] Andrew M. Cuomo, Attorney General, Albany (Julie S. Mereson of counsel), forCommissioner of Taxation and Finance, respondent.
Kavanagh, J. Proceeding pursuant to CPLR article 78 (initiated in this Court pursuant to TaxLaw § 2016) to review a determination of respondent Tax Appeals Tribunal which deniedpetitioner's request for a refund of sales tax imposed under Tax Law article 28.
Petitioner is a New York public utility which provides telecommunication services toconsumers nationwide. It purchases electricity from Consolidated Edison and converts it to directcurrent to power its telephone switch equipment which is essential to the production of itstelecommunications service. In May 2003, petitioner applied to the Division of Taxation andFinance for a refund of all state sales tax it had paid on the purchase of this electricity for a2½-year period commencing in January 2000.[FN1]When its application for a refund was denied, a conciliation conference was held and,subsequently, the denial was sustained. Petitioner challenged that determination by way of anadministrative petition claiming that it was entitled to have its purchases of electricity heldexempt from the imposition of a sales tax pursuant to Tax Law § 1115 (a) (12) and (12-a)and (c) (1). An Administrative Law Judge (hereinafter ALJ) [*2]determined that petitioner's purchases were properly subject to thesales tax and that the statutory exemptions did not apply. Petitioner appealed to respondent TaxAppeals Tribunal which adopted and affirmed the ALJ's determinations without further opinion.Petitioner commenced this CPLR article 78 proceeding in this Court seeking to annul theTribunal's determination on the ground that it is arbitrary and capricious.
Initially, we note that the Tribunal's interpretation and administration of the Tax Law isentitled to deference (see Matter ofFuchsberg & Fuchsberg v Commissioner of Taxation & Fin., 13 AD3d 831, 833[2004]), and its findings must be upheld if rationally based and not ultimately proven to be"erroneous, arbitrary or capricious" (Matter of Upstate Farms Coop. v Tax Appeals Trib. ofState of N.Y., 290 AD2d 896, 898 [2002]). In addition, a taxpayer who claims to bestatutorily exempt from the payment of a tax has the burden of proving that he or she is entitledto the exemption (see Matter of Grace v New York State Tax Commn., 37 NY2d 193,195 [1975]; Matter of Upstate Farms Coop. v Tax Appeals Trib. of State of N.Y., 290AD2d at 897-898), and, unless that burden is met, the statute authorizing the exemption will bestrictly construed against the taxpayer, "although the interpretation should not be so narrow andliteral as to defeat its settled purpose" (Matter of Sumitomo Trust & Banking Co. [U.S.A.] vCommissioner of Taxation & Fin., 280 AD2d 706, 708 [2001] [internal quotation marks andcitation omitted]).
The tax challenged by petitioner was imposed pursuant to Tax Law § 1105 (b) (1) (A),which applies to utilities and telecommunications providers. Tax Law § 1105 (b) (1) statesthat a sales tax shall be imposed upon "[t]he receipts from every sale, other than sales for resale,of the following: (A) gas, electricity." Petitioner, for the first time in this proceeding, argues thatthe electricity it purchased should not be subject to sales tax because it is, in effect, a componentpart of the product it sells to its customers and, as such, qualifies as a resale of the electricitywhich should be excluded from sales tax liability. Given that this argument was not raised eitherbefore the ALJ or the Tribunal, it is not preserved for our review and may not be raised in thisproceeding (see Matter of Karay Rest. Corp. v Tax Appeals Trib., 274 AD2d 854, 855[2000], lv denied 96 NY2d 702 [2001]; see also Matter of Rizzo v New York State Div. of Hous. & CommunityRenewal, 16 AD3d 72, 75 [2005], affd 6 NY3d 104 [2005]). Petitioner'scontention that this position is clearly implied by the administrative challenge to the sales tax itmade in the proceedings is not supported by the record and, even if it were, that fact does notexcuse its failure to directly address and advance this issue prior to taking this appeal (seeMatter of Henry v Wetzler, 82 NY2d 859, 862 [1993], cert denied 511 US 1126[1994]; Matter of Karay Rest. Corp. v Tax Appeals Trib., 274 AD2d at 855-856;Matter of Mera v Tax Appeals Trib. of State of N.Y., 204 AD2d 818, 821 [1994]).Moreover, even if we were to consider this argument, the fact is that petitioner did not purchaseelectricity "for resale as such" as is required to receive the exemption under this statute (20NYCRR 527.2 [e]). Instead, it used the electricity to produce telecommunications services that itactually sold.
In the alternative, petitioner points to three statutory subdivisions of Tax Law § 1115which it says apply to its purchase of electricity and exempts those transactions from the sales tax(see Tax Law § 1115 [a] [12], [12-a]; [c] [1]). Initially, it must be noted that two ofthese exemptions, Tax Law § 1115 (a) (12) and (12-a), have no application to any taximposed pursuant to Tax Law § 1105 (b) and, therefore, do not apply to petitioner'spurchase of electricity. Specifically, both of these exemptions are contained in Tax Law §1115 (a) which, by its terms, limits the exemptions contained therein to "retail sales imposedunder subdivision (a) of [Tax Law § 1105] and the compensating use tax imposed under[Tax Law § 1110]" (Tax Law § 1115[*3][a]). Inshort, since the tax challenged by petitioner was imposed pursuant to Tax Law § 1105 (b),and not Tax Law § 1105 (a), the exemptions set forth in Tax Law § 1115 (a) (12)and (12-a) have no application to petitioner's purchase of electricity and do not serve to exemptany of these transactions from payment of the sales tax.
The intent of the Legislature to limit the application of the exemptions listed within Tax Law§ 1115 (a) is further evidenced by other subdivisions of Tax Law § 1115 whichspecifically apply to both Tax Law § 1105 (a) and (b) (compare Tax Law §1115 [a] with Tax Law § 1115 [c]). As such, because the Legislature's intent is"plain, clear and distinct from a literal reading of the statute," the paragraphs of Tax Law §1115 (a) may not be used to exempt petitioner from the sales tax imposed by Tax Law §1105 (b) (1) (A) (Matter of American Communications Tech. v State of N.Y. Tax AppealsTrib., 185 AD2d 79, 82 [1993], affd 83 NY2d 773 [1994]).[FN2]Even if we were to find that these provisions do apply to petitioner's purchase of electricity, thereare other compelling reasons why they would not exempt it from paying the sales tax. Forexample, Tax Law § 1115 (a) (12) provides an exemption for the purchase of "[m]achineryor equipment for use or consumption directly and predominantly in the production of. . . electricity." By its plain terms, this provision applies only to the purchase ofmachinery and equipment, and not to electricity that is used to power that equipment.
Petitioner also argues that it is entitled to an exemption under Tax Law § 1115 (a)(12-a), which provides an exemption to any purchase of "[t]angible personal property for use orconsumption directly and predominantly in the receiving, initiating, amplifying, processing,transmitting, retransmitting, switching or monitoring of switching of telecommunicationsservices for sale or internet access services for sale or any combination thereof." Electricity,simply stated, is not a tangible piece of property that has a material existence or physical form.As such, for reasons more fully stated below, it does not qualify as tangible personal property,and this exemption has no application to petitioner's purchases of electricity.
Petitioner's third and final claim is based on an exemption contained in the Tax Law whichapplies to the purchase of "electricity . . . for use or consumption directly andexclusively in the production of tangible personal property" (Tax Law § 1115 [c] [1]). Tobenefit from this exemption, it must be found that the telecommunications service that petitionerprovides is tangible personal property. Tangible personal property is defined in the Tax Law as"[c]orporeal personal property of any nature" (Tax Law § 1101 [b] [6]), and in theregulations as "corporeal personal property of any nature having a material existence andperceptibility to the human [*4]senses" (20 NYCRR 526.8 [a]).Black's Law Dictionary defines corporeal as "[h]aving a physical, material existence," and statesthat "land and fixtures are corporeal property" (Black's Law Dictionary 368, 1253 [8th ed 2004]).These definitions clearly encompass something physical, as evidenced by the examples listed in20 NYCRR 526.8, all of which are material, tangible, and corporeal objects (see 20NYCRR 526.8).[FN3]Telecommunications, as petitioner concedes, consist of digital signals which travel over wiresand are received by separate equipment, i.e., a telephone which allows a customer to participatein a communication. No evidence has been submitted by petitioner that these signals are physical,corporeal objects which have a material existence that is perceived by the senses.
Moreover, telecommunications, as previously noted, are taxed under Tax Law § 1105(b), and not under Tax Law § 1105 (a), which applies to transactions involving tangiblepersonal property. Had the Legislature intended telecommunications to constitute tangiblepersonal property, Tax Law § 1105 (b) would be redundant, ineffective, and anunnecessary addition to [*5]the Tax Law (see McKinney'sCons Laws of NY, Book 1, Statutes § 144, at 292).
In that vein, the term "[t]elecommunications services" is defined in the Tax Law as"telephony or telegraphy, or telephone or telegraph service, including, but not limited to, anytransmission of voice, image, data, information and paging, through the use of wire, cable,fiber-optic, laser, microwave, radio wave, satellite or similar media or any combination thereof,"and also includes "services that are ancillary to the provision of telephone service (such as, butnot limited to, dial tone, basic service, directory information, call forwarding,caller-identification, call-waiting and the like) and also include[s] any equipment and servicesprovided therewith" (Tax Law § 186-e [1] [g]). To expand the definition of tangiblepersonal property to include such intangible services is a decision which must be left to theLegislature. Until the Legislature sees fit to make such a determination, this Court is left with nochoice but to conclude that the telecommunications services provided by petitioner are nottangible personal property and, as such, do not entitle petitioner to an exemption to the sales taxprovisions of the Tax Law.
Finally, petitioner contends that the failure to provide it with an exemption will result inmultiple taxation that should be avoided. There is nothing inherently improper in taxingpetitioner's purchase of electricity and imposing a second tax on those individuals who purchaseits telecommunications services (see 2 Hellerstein and Hellerstein, State Taxation ¶14.01 [3d ed]). Stated another way, simply because a purchase is made to produce or provide aproduct that will ultimately be sold to a consumer, does not automatically exclude or exempt thattransaction from application of the sales tax (see Celestial Food of Massapequa Corp. v NewYork State Tax Commn., 63 NY2d 1020, 1022 [1984]).
For all of the reasons set forth above, petitioner's claim to a refund of sales tax as previouslypaid was properly denied by the Tribunal.
Mercure, J.P., Peters, Kane and Stein, JJ., concur. Adjudged that the determination isconfirmed, without costs, and petition dismissed.
Footnote 1: The amount of the refundrequested was $176,238.30.
Footnote 2: Petitioner's reliance onMatter of American Airlines, Inc. (2007 WL 507049 [Tax Appeals Trib, DTA No.819514, Feb. 1, 2007]) does not require a different result. The Tribunal in that matter specificallystated that it only applied the exemption from Tax Law § 1115 (a) to taxes imposed underTax Law § 1105 (b) because the parties had stipulated that, if a given condition was met,liability must be imposed regardless of the inapplicability of the exemptions. As a result of thatstipulation, the Tribunal was constrained to impose liability although it would not otherwise havebeen able to do so.
Footnote 3: The Tax Law does include astangible physical property "pre-written" computer software, regardless of the means by which thesoftware is sent to the purchaser, and newspapers and periodicals delivered to the purchaser "bymeans of telephony or telegraphy or other electronic media," so long as there is an identical hardcopy of such newspaper (Tax Law § 1101 [b] [6]). However, these two carefully drawnadditions to the definition both involve products which have a tangible, physical form."[P]re-written" computer software was added to permit the imposition of sales tax onnoncustomized, potentially mass-produced software, and the legislative history indicates that theexpected medium at the time for such software was in the form of a hard disc or tape (seeLetter of Commr of Dept of Taxation and Fin, Bill Jacket, L 1991, ch 166, at 175-176[construing section 154 of the legislation]). Newspapers and periodicals delivered by electronicor telephonic means were added to extend the exemption given to hard copy newspapers so thatthe right to free speech would not depend upon the format, and it was drafted narrowly to ensurethat there was a tangible paper copy for anything transmitted telephonically or electronically(see Mem of Assembly in Support, Bill Jacket, L 1994, ch 498, at 5; Mem of NY St Deptof Economic Dev, Bill Jacket, L 1994, ch 498, at 12; Mem of Dept of Taxation and Fin, BillJacket, L 1994, ch 498, at 13). Inasmuch as both of these products had a physical form of somekind, their inclusion does not expand the definition of tangible property to any type of intangibleproduct.